Gambar halaman
PDF
ePub

the Metropolitan Life Insurance Company and a vice president of the Prudential Life Insurance Company testified in favor of the plan. As originally drafted and filed with this Commission, the maturity dates of the prior-lien bonds were to be extended for periods ranging from 21 to 25 years, but as a result of conferences with security holders and the representatives of large institutional holders it was decided to increase these periods by 5 years, thus affording additional time for debt reduction and possible refunding. As the convertible bonds are subordinate to all the others and unsecured, the date of their maturity is to be extended beyond that of all the other affected bonds. By providing that about one-third of the interest is to be on a contingent basis, thereby keeping fixed charges to a minimum, the possibility of bankruptcy during periods of low earnings will be minimized, thus insuring against possible losses to creditors, particularly the holders of unsecured bonds, and stockholders.

The plan is feasible in the first instance, only if it is acceptable to the holders of a sufficient amount of affected claims to make its consummation possible under the law. Intervener Randolph Phillips contends that it is not feasible in that the necessary assents from holders of convertible bonds cannot be obtained. He filed a petition requesting us to require the applicant to file in this proceeding the names, addresses, and holdings of all holders of convertible bonds. The record shows that a draft of the plan of September 20, 1944, has been sent to all creditors whose claims are to be affected by it and whose addresses were known, and notice of this proceeding was given due publication. His petition was denied.

We are not persuaded that the plan contains provisions which would make it difficult of execution. The supplemental indentures to the several mortgages will provide for future refunding and for financing improvements either by first-lien issues or by the issue of refundingmortgage bonds. The issue of new bonds for improvements will be limited to 75 percent of the net increase in investment, so that the amount of uncapitalized assets will not be diminished by such issue.

Extension for longer periods of time might be desirable, but in view of the maturities of the bonds not to be extended by the plan, that is the refunding bonds maturing in 1995, 1996, and 2000, applicant considered it important to have the maturities well spaced. The dates of maturity of the applicant's own major issues prior to 1995 giving effect to the proposed extensions will be January 1, 1965, for the collateral-trust bonds, July 1, 1975, for the first-mortgage bonds, July 1 and November 1, 1980, for the Southwestern division and Pittsburgh, Lake Erie & West Virginia bonds, respectively, and July 1, 1985, for the Toledo-Cincinnati division bonds. What amounts of these bonds will be outstanding at their maturity is not now ascertainable, but

statement showing the amounts of all system issues outstanding as of August 31, 1944, is contained in appendix C. With the maturities extended and the provisions of the plan for reduction of debt and lower fixed charges, there appears little probability, in the light of past experience, that the applicant will not be in a position to pay or refinance its obligations when they mature or that it will be in need of financial reorganization or adjustment.

The fixed interest provided for by the plan of recapitalization based on securities outstanding as of August 31, 1944, including unassumed bonds of operated subsidiaries, is $17,567,299, and the yearly averages of other fixed charges from 1942 to June 1944 were $1,320,430. If these be considered applicable as of the date of exchange, the total fixed charges will amount to $18,887,729. During the entire period from 1921 to 1944, the applicant's earnings were sufficient to meet these charges each year. Under the sinking-fund provision of the plan, these charges will be reduced from time to time, but on the other hand there may be some increases to the extent that future improvements are financed with bonds. As to the other requirements of the plan, the earnings experience over the period mentioned shows that there were years in which all the requirements would not have been met, but the 7-year averages previously mentioned show that in each of those periods the average income available for fixed charges was sufficient to provide, in each case, sufficient funds to pay the fixed charges, capital funds, sinking fund, and contingent interest, both secured and unsecured. If the period following the first World War is in any way indicative of the income which may be expected after the present war, the applicant's income should be ample to meet its fixed charges.

The provisions of the plan for future financing, by the issue of bonds under the first-lien mortgages, or the creation of new first-lien mortgages have been set forth in the description of the plan and of the several issues of bonds affected by it. It is anticipated that by reducing the outstanding debt and increasing the investment securing it, it may be possible at some future date to refinance some of the outstanding issues on more favorable terms.

Equipment purchases in general are initially financed through equipment trusts or conditional-sale agreements. The advantage of this means of financing is indicated by the fact that in August 1938 the interest rates on the applicant's outstanding equipment obligations ranged from 32 to 5 percent per annum, while the rates on those outstanding at present range from 12 to 3 percent. As a result of this decrease in rates the annual charges for interest on approximately $5,000,000 more equipment obligations are $249,000 less than those on August 15, 1938.

The applicant expects that the capital fund will provide a substantial part of the funds required for the regular program of improvements and betterments. The annual report to the applicant's stockholders for 1943 contains the statement that "Although track and rolling equipment have been well maintained, the wear and tear through constant use in handling the war-time load is taking its toll of the service life. This necessitates more expensive maintenance and hastens the date when replacement will be necessary." The applicant's chief engineer testified that deferred maintenance for rail and track structure for the 5-year period ending in 1944 is a little less than $2,000,000 in capital expenditures and between $4,000,000 and $5,000,000 in operating expenses. In addition there is considerable deferred maintenance on buildings and a little on communication lines, but not much on bridges. His testimony shows that the average annual expenditures for the 20-year period 1924–43, for improvements and betterments, were approximately $7,734,000, for 1944 approximately $9,065,000, and the annual average for the years 1939 to 1943, inclusive, was $5,651,000. The program of improvements since 1938 was comprehensive, and includes in addition to the improvements normally involved, track connections and additional yard tracks and ground storage facilities at a number of locations to provide increased capacity for the handling of war materials. It is anticipated that approximately $6,000,000 will be required in 1945, if the necessary labor and material are available, for improvements and betterments incident to proper maintenance, including bridge renewals, rail betterments, machinery replacements, signals, and interlocking and similar items comprising the normal program. If labor and material are available, an additional $3,000,000 may be spent on the application of "AB" brakes on equipment.

In addition to the improvements comprising this program, a number of major projects are in contemplation, to be undertaken at some future time when conditions permit. These include new yard and engine terminals at a number of points, yard revisions and installation of car retarders at two locations, replacing coal- and ore-handling facilities at three of the lake ports in Ohio, a tunnel on the main line at Bridgeport, W. Va., a modern car repair shop at some point on the system, and three or four other projects of some magnitude. There are other improvements contemplated in the long-range planning, but not for the near future.

It is expected that the capital fund will be adequate to finance all the programmed work and a large part of the major projects. Some of them will have to be financed by the issue of bonds unless the money is available out of earnings. The estimated cost of the major projects which may have to be financed with bonds is approximately $21,950,

000. The provisions of the several first-lien mortgages for the issue of new bonds appear adequate to provide for these improvements, within the limitations to be prescribed in the supplemental indentures. Contentions of interveners.-George H. Phillips, in a brief that he filed, sets forth his objections to the plan, which he contends is unfair to the holders of convertible bonds. His objection is directed primarily to the fact that the maturity date of the convertibles is extended for a longer period than the other bonds, that the payment of interest is to be contingent on earnings and payable after providing for the capital fund and sinking fund, and that while this condition prevails dividends may be paid on the stock. He contends that so long as the property is owned and managed by its present owners, all debts, secured and unsecured, are alike and no distinction should be made in the treatment of the bonds of various classes. He further contends that a finding by this Commission that the plan is in the public interest and the best interests of each class of creditors and stockholders, will have the effect of a judicial finding that it is fair and equitable and will tend to deter bondholders from offering opposition to the plan. As an alternative he offers a proposal directed at reducing the debt ultimately to $400,000,000 and fixed charges to $18,000,000 as a maximum. He would extend all bonds for equal periods of time from their original maturity dates, and would make all interest payments as originally provided unless all holders agree otherwise. After providing for a betterment fund and a limited capital fund, the remaining funds would be applied to debt retirement. The applicant points out that the treatment of the convertible bonds is in accord with their unsecured position. No evidence was offered in support of these contentions.

Intervener Randolph Phillips, in his brief, reiterates his contentions in respect to the lack of notice to the affected parties and gives that as one of the grounds for his motion to dismiss the applicant's petition to which reference has previously been made in this report. His contention is that certain functions of this Commission in a chapter XV proceeding are analogous to those of a district court, and the Commission is accordingly bound by the rules governing judicial procedure; that the plan as modified differs from the plan sent to the bondholders, and the present proceeding is null and void. He further contends that the applicant has not substantiated its allegation that it is unable to meet its matured and unpaid debts; that no effort has been made to sell the collateral securing the debt, much of which consists of securities listed on the New York Stock Exchange. He contends further that the plan is not fair and equitable to holders of the convertible bonds and is not in their best interests; that they are asked to give up, without compensatian of any kind, their right to collect

fixed interest beginning August 1, 1946, and to collect the principal on February 1, 1960, and to relinquish their right to enforce the payment of interest while the equity of the stockholders remains unimpaired. He objects to making provision for payments into a capital fund and sinking fund ahead of the payment of contingent interest; and for the creation of new debt senior to the claims of the convertible bonds. He contends that the provision of the plan for a sinking fund to be applied to debt retirement is no guarantee of additional security for the convertible bonds, because there is no limit on the amount of new debt that may be created ahead of these bonds. His contention that the plan is not feasible has been previously referred to in this report. He proposes that the applicant apply $30,000,000 of its current cash to retirement of the Finance Corporation notes and issue new notes or bonds secured by the collateral now pledged, to pay the balance, or sell a part of the collateral and apply the proceeds together with the current cash to the payment of the debt in full. He therefore requests that the application be denied, or be denied subject to reconsideration upon payment by the applicant of $30,000,000 of the debt, and a showing that it has made bona fide efforts to sell at prevailing prices certain stock now pledged.

In reply thereto the applicant points out that as of October 31, 1944, it had current assets of $126,161,874 of which $69,048,949 was cash and cash investments, and $20,614,288 was material and supplies. Against this it had current liabilities of $90,310,015. If it were to pay $30,000,000 out of its current cash as proposed by the intervener it would be necessary to sell its material and supplies to meet current obligations leaving the applicant without any material and supplies and a balance of $5,851,859, an amount insufficient to pay contingent interest already earned to that date. The applicant further points to the fact that it is confronted with the maturity of $144,000,000 of bonds in 1948; $37,000,000 in 1950; and $36,000,000 in 1951, and raises the question as to how, without working capital, in the face of these maturities it could continue to operate its system. As to the intervener's contention that due notice was not given, the applicant asserts that it has complied with all the requirements of chapter XV and that all holders of affected securities whose names and addresses were known to it were notified of its intention to institute this proceeding. As to the intervener's contention that the plan is not beneficial to the holders of convertible bonds, the applicant points to the benefits to the convertibles by placing much of the prior-lien interest on a contingent basis. It is further pointed out in respect to the intervener's contention that the plan is not feasible, and that he failed to furnish any testimony to support his opinion.

« SebelumnyaLanjutkan »